Is Receivables Financing a Good Business Funding Option?
As a small business owner, choosing the right funding solution depends on your specific business circumstances and goals. Receivables financing (also known as accounts receivable financing or A/R financing) is one funding option that can quickly boost short-term cash flow. But when should you consider receivables financing for your business over other lending options?
What is Receivables Financing?
Receivables financing is an asset-based transaction where a borrower receives a cash advance from a lender in exchange for their unpaid customer invoices – or receivables. The unpaid invoices themselves act as collateral in this scenario, so no additional business collateral or personal guarantee is required from the business owner.
Funding terms in a receivables financing transaction are typically short-term and straightforward, without all of the repayment rules and conditions that can accompany a traditional loan. The purpose is to simply release the capital that’s tied up in a business’s unpaid invoices, so it can immediately be utilized to manage cash flow, pay bills, or invest in growth opportunities.
Although similar in concept, receivables financing differs from receivables factoring, which is when a factoring company will actually take ownership of the unpaid invoices, buying them at a discounted rate and collecting on the balance. In an A/R financing agreement, the business owner retains the relationship with the customer, and continues to manage the collection of the unpaid invoices.
Why Consider Receivables Financing
The decision to use receivables financing instead of other lending options like a traditional loan again depends on your business situation and goals. With receivables financing, a lender can advance funds immediately – often within 24 hours of application approval – making it a great choice for short-term funding to cover the cash flow deficiencies brought on by unpaid invoices.
The structure of A/R financing is also ideal in situations where a small business has outstanding receivables from reliable B2B customers, but may not have the time or meet the qualifications required to obtain a traditional term loan. Lenders offering A/R financing are primarily interested in the quality of the receivables themselves, so they will be more forgiving if a business owner has a less than stellar financial record or credit history.
Best Uses for Receivables Financing
Because term loans allow you to borrow a larger amount of money and pay it off slowly, they can be a better option for business owners who may have a specific investment in mind, like buying equipment, adding employees, purchasing inventory or preparing for a seasonal spike in business. A more established company with a solid financial track record and a good credit score is also a better candidate to qualify for a traditional term loan.
On the other hand, receivables financing is a better option for a fast growing B2B-focused company that may be having trouble keeping up with cash flow demands due to unpaid invoices. For example, if a business is required to pay for materials and inventory well ahead of when they will receive payment for the cost of those goods, receivables financing can fill in the gap.
A/R financing can also be a good option for newer businesses who don’t have established credit yet, as the emphasis is on the quality of their receivables rather than the financial history of their business.
While it’s important to consider all your options when looking for business funding, for the reasons detailed above, receivables funding can be a great choice for fast, short-term working capital. And because the underwriting process is so straightforward, applying for A/R financing is easy and approval can be received in a matter of hours. Once approved, funds can be in your bank account within 24 hours.
QuickBridge offers a range of alternative lending options, including receivables financing, and works with small businesses to help them find the funding solution that offers the right fit at the right time.